Systems and methods for providing a futures contracts on options contracts exchange device

ABSTRACT

Futures contracts on options contracts are provided in which the duty to purchase the right to purchase a commodity or security may be agreed upon by two or more parties. The futures contract segment of the exchange device is the duty to purchase the underlying options contract at a specific time. The options contract segment of the exchange device is the right to buy an underlying security or commodity. Margin schemes may be included in either segment of the exchange device or the exchange device as a whole.

BACKGROUND OF THE INVENTION

[0001] Certain options contracts tend to be restricted at least in partbecause of the requirements for options contracts obtained as a means ofemployment compensation. For example, during the “dot-com boom” whenstart-up initial public offerings (IPO's) were widespread, optionscontracts were often used as a primary source of compensation. Suchcompensatory options contracts were given to employees by his or heremploying company. The options contracts gave the employee the right topurchase up to a specific number of the employing companies stock at acertain price or strike price. Companies using options as a compensationdevice were able to decrease cash out-flow while increasing anemployee's desire to see the company succeed. If the company succeeded,the compensatory options contracts would increase in value and theemployee would incur relative profits when he or she exercised theoption contracts.

[0002] However, the exercising of compensatory options contracts usuallyincluded limitations not found in basic options contracts. Theselimitations were included in order to meet specific goals of theemploying company. Such goals included stock price stabilization andcapital preservation. One common limitation was a time limitation thatprohibited employees from exercising an options contract until a certainamount of time had passed. On the other hand, advantages over basicoptions contracts were present in compensatory options contracts. Onecommon example was the elimination of an expiration date or the increasein time that the compensatory option contract could be exercised.

[0003] Future contracts are well known in the art and are recognized asthe duty for one party to purchase or sell an underlying commodity toanother party at a specific date or delivery date. Options contracts arealso well known in the art and are recognized as the right of a party topurchase or sell an underlying security at a specific date for aspecific price.

[0004] It would be desirable to improve market liquidity and introduce anovel securities exchange mechanism that would allow for alternativeinvestment hedging techniques and speculation by providing systems andmethods for providing futures contracts on options contracts.

SUMMARY OF THE INVENTION

[0005] The present invention relates to systems and methods forproviding a novel securities exchange mechanism that would allow foralternative investment hedging techniques and speculation. Thisinvention also relates to improving the liquidity and distributionnetwork for options contracts. Particularly, it is an object of thisinvention to provide futures contracts on options contracts, in whichthe duty to purchase the right to purchase a commodity or security maybe agreed upon by two or more parties.

[0006] The futures contract segment of the exchange device is the dutyto purchase the underlying options contract. Generally, a specificdelivery date or delivery interval will be included in the futurescontract and this is the date at which the exchange will occur.

[0007] Pricing of the futures contract may depend on a variety ofvariables including the current price of the options contract and theamount of time until the delivery date is reached. Other pricingmechanisms may be used such as a Black-Scholes derivative or a pricingscheme based on speculating future value. However, in exchanges wherefree markets are formed, the price of the futures contract will reflectsupply and demand in which buyers and sellers determine the exchangeprice.

[0008] The options contract segment of the exchange device is the rightto buy an underlying security or commodity. Generally, this will includea specific price and a particular interval in which the option may beexercised. Additional limitations may be imposed in either segment ofthe exchange device or the exchange device as a whole.

[0009] Margin schemes may be included in either segment of the exchangedevice or the exchange device as a whole. One margin scheme may be basedon an algorithm utilizing the attributes of both a futures contract andan options contract. Other margin schemes may, for example, be the basisof a percentage of a particular price or incorporate initial andmaintenance margin thresholds.

[0010] One area where futures on options contracts may find acceptanceis with compensatory option contracts. Particularly, futures on optionscontracts may provide an employee with the opportunity to realize a saleprice on compensatory options before that employee is able to exercisethe option due to time restrictions imposed by the employer. Thisinvention would have been very useful during the “dot-com crash”, inwhich stock prices of start-ups went into a free-fall. If futurecontracts on options contracts were available during the “dot-comcrash”, employees may have been able to preserve profits the economicresult of the phenomena may have been substantially different.

[0011] Using the “dot-com crash” scenario as an example to illustratethe invention, a party obtaining a futures contract on an optionscontract may find many benefits not found in other devices.

[0012] Moreover if a party was allowed to sell a futures contract oncompensatory options, he may have received some value from these optionbefore these options became valueless. Furthermore, other parties may begiven an opportunity to participate in compensatory options programswithout having to actually be employed by the company that is providingthe options. Preferably this is permitted by the company issuing theoptions.

[0013] The futures on options exchange device may offer new and uniquemethods for hedging and investment speculation. Additionally, futures onoptions contracts may provide an alternative to long-term optioncontracts or “leaps”.

[0014] Furthermore, some compensatory option contracts sometimes containadvantages not contained in normal options contracts. Particularly,compensatory options contracts sometimes do not have an expiration dateand, therefore, can be exercised at any time. In exchange for thisadvantage, the employee is required to wait a period of time before hecan exercise the options so that the employing company is strengthenedand capital is preserved. For this reason, a futures on options contractunderwritten by an employee for his or her options may not have anexpiration date on those options. As a result of these advantages, newspeculative attributes may be present in the present invention which maybe attractive as an investment mechanism.

[0015] It is therefore an object of the present invention to providesystems and methods for providing a futures contract on options contractexchange device. Generally, this exchange device is an agreement for theduty to purchase the right to purchase a particular security orcommodity.

BRIEF DESCRIPTIONS OF THE INVENTION

[0016] Further features of the invention, its nature and variousadvantages will be apparent from the following detailed description ofthe preferred embodiments, taken in conjunction with the accompanyingdrawings, in which like reference characters refer to like partsthroughout, and in which:

[0017]FIG. 1 is an illustration of an electronic implementation of asystem to sell a futures contract on an options contract in accordancewith some embodiments of the present invention.

[0018]FIG. 2 is an illustration, in greater detail, of an electronicimplementation of a system to sell a futures contract on an optionscontract in accordance with some embodiments of the present invention.

[0019]FIG. 3 is a flow chart that is illustrative of a method to provideand trade a futures contract on an options contract in accordance withthe principles of the present invention.

[0020]FIG. 4 is a flow chart that is illustrative of a method to provideand deliver a futures contract on an options contract in accordance withthe principles of the present invention.

[0021]FIG. 5 is an illustration of a chart of data for futures contractson options contracts in accordance with some embodiments of the presentinvention.

DETAILED DESCRIPTION OF THE INVENTION

[0022] This invention relates to creating systems and methods forproviding futures contracts for (or on) options contracts. The followingembodiments of the invention relates to restricted options contractssuch as compensatory options contracts. Nevertheless, these examples donot limit the invention to this particular subject matter. Rather, theexamples are provided for illustration of the invention and not to limitit to a particular commodity, market, or type of option.

[0023] Referring to FIG. 1, exemplary system 100 for implementing thepresent invention is shown. As illustrated, system 100 may include oneor more workstations 101. Workstations 101 may be local or remote, andare connected by one or more communications links 102 to computernetwork 103 that is linked via communications links 105 to server 104.Server 104 is linked via communications link 110 to back office clearingcenter 112.

[0024] In system 100, server 104 may be any suitable server, processor,computer, or data processing device, or combination of the same. Server104 may be used to process and settle executed trades of futurescontracts on options contracts.

[0025] Computer network 103 may be any suitable computer networkincluding the Internet, an intranet, a wide-area network (WAN), alocal-area network (LAN), a wireless network, a digital subscriber line(DSL) network, a frame relay network, an asynchronous transfer mode(ATM) network, a virtual private network (VPN), or any combination ofany of the same. Communications links 102 and 105 may be anycommunications links suitable for communicating data betweenworkstations 101 and server 104, such as network links, dial-up links,wireless links, hard-wired links, etc.

[0026] Workstations 101 may be personal computers, laptop computers,mainframe computers, dumb terminals, data displays, Internet browsers,Personal Digital Assistants (PDAs), two-way pagers, wireless terminals,portable telephones, etc., or any combination of the same. Workstations101 may be used to enter into and proceed with the trades that relate tothe present invention, and display trade, benchmark, or spreadinformation to users of system 100.

[0027] Back office clearing center 112 may be any suitable equipment,such as a computer, a laptop computer, a mainframe computer, etc., orany combination of the same, for causing trades to be cleared and/orverifying that trades are cleared. Communications link 110 may be anycommunications links suitable for communicating data between server 104and back office clearing center 112, such as network links, dial-uplinks, wireless links, hard-wired links, etc.

[0028] The server, the back office clearing center, and one of theworkstations, which are depicted in FIG. 1, are illustrated in moredetail in FIG. 2. Referring to FIG. 2, workstation 101 may includeprocessor 201, display 202, input device 203, and memory 204, which maybe interconnected. In a preferred embodiment, memory 204 contains astorage device for storing a workstation program for controllingprocessor 201. Processor 201 may use the workstation program to presenton display 202 trade information relating to bids, offers, executedtrades, and options information to a user of workstation 101.Furthermore, input device 203 may be used by the user to enter such bidsand offers, modify them, and to enter into trades involving the futurescontracts on options contracts.

[0029] Server 104 may include processor 211, display 212, input device213, and memory 214, which may be interconnected. In a preferredembodiment, memory 214 contains a storage device for storing tradeinformation relating to the trades. The storage device further containsa server program for controlling processor 211. Processor 211 uses theserver program to transact the purchase and sale of the futurescontracts on options contracts.

[0030] The server program operative on processor 211 may be made up of aplurality of individual software modules. These modules may all bepresent on the one server as in this example or spread amongst multiplesystems. These modules are programmed in such a way as to workcollectively to implement the full functionality of server 104. Some ofthe software modules implement the basic functionality of server104—i.e., the operating system modules. Other modules may implement thesystems and methods of the present inventions—i.e. an options analysismodule, a futures contract creation module, and a futures contracttrading modules. Still other software modules may implement theconfiguration of server 104. Persons skilled in the art will recognizethat the use of software modules to describe different parts of theserver program is one way of breaking down the program design for easierdescription and implementation. The systems and methods of the presentinvention may be implemented without using the modules as described,they are merely representative of one potential embodiment of the serverprogram.

[0031] Processor 211 may include futures on options calculationprocessor 215 that may be implemented to determine the benchmark valuesbased on market conditions or other criteria that may relate to theitems. Processor 211 may include trade processor 216 that executes andprocesses trades.

[0032] Back office clearing center 112 may include processor 221,display 222, input device 223, and memory 224, which may beinterconnected. In a preferred embodiment, memory 224 contains a storagedevice for storing a clearing program for controlling processor 221.Processor 221 uses the clearing program to clear executed trades.Clearing executed trades may preferably include exchanging currency fora future commitment to purchase or sell an option.

[0033]FIG. 3 is an illustrative flow chart 310, in which one embodimentof a method for providing and delivering a futures contract on anoptions contract is depicted. Included in flow chart 310 are threefunctions that are depicted as steps 311, 312, and 313.

[0034] The first step in flow chart 310 is step 311, in which arestricted options contract is provided. One example of a restrictedoptions contract is a compensatory options contract supplied by anemployer to an employee. The underlying security for such a restrictedoptions contract may be the common stock for the employing company.Other types of underlying securities for a compensatory option mayinclude, for example, preferred stock, convertible bonds, and corporatebonds.

[0035] Generally, the provided options contract is the right to purchaseor sell the underlying security at a specific price. For example,suppose the price of a common stock of Company A is $10.00. If Company Agives an employee 100 common stock options at a strike price of $10.00as a compensatory device then Company A has given the employees theright to buy 100 of Company A's common stock at a price of $10.00. Whenan employee decides to purchase a common stock through a stock option,that employee is said to have exercised his option or right to buy theunderlying security.

[0036] Typically, restrictions are imposed on a compensatory stockoption. One such restriction is a waiting period, during which the stockoptions may not be exercised. For example, Company A may require thatits employees do not exercise stock options given to them by Company Afor at least a year. If at the end of this year Company A's common stockprice is at $25.00 and the employee exercises all 100 of the stockoptions than that employee buys the stock at $10.00. In such asituation, the employee will have made an unrealized profit of $15.00per share.

[0037] An options contract may be used as a device to exchange aspecific number of stock options. For example, a single options contractmay be used to exchange 100 stock options. Persons skilled in the art,however, will appreciate that an options contract may be used to alsoexchange a single stock option.

[0038] The next step in FIG. 3 is step 312, in which a futures contractbased on the provided options contract is created. As stated before, afutures contract is the duty to purchase or sell an underlying securityor commodity at a certain date. In a preferred embodiment of theinvention, the trading price of the underlying security may bedetermined when the futures contract is created. Persons skilled in theart will appreciate, however, that other pricing mechanisms such asspeculative pricing mechanisms may be agreed upon by the party orparties creating the future contract.

[0039] In accordance with the present invention, a futures contract onan options contract is the duty on behalf of the purchaser of thefutures contract to purchase an option contract of 100 stock options orother suitable amount from the issuer of the futures contract. Inaccordance with the above examples, suppose the stock price of Company Aincreases to $25.00 within the first 6 months that the employee has theoptions contract. Accordingly, the employee may use his 100 stockoptions as an underlying security to a futures contract. The time ofdelivery of such a futures contract may be, for example, the time atwhich the employee gains control of his or her stock options. The priceof the futures contract may be $16000 or $16.00 per underlying sharewhere $15000 (e.g., $15.00 per share) is the unrealized profit of theoptions contract if the current stock price is $25.00 a share. Theadditional $1000 (e.g. $1.00 per share) may include underwriting thefutures contract, and the price of speculation incorporated into theoptions contract (since options contracts have their own expirationdate). As a result, a futures on options contract may allow an employeewho owns a restricted options contract to realize profits (e.g., lock ina price) before the waiting period has been exhausted. Moreover, otherparties may be given an opportunity to participate in compensatoryoptions programs without having to actually be employed by the companythat was providing the options. Preferably this is permitted by thecompany issuing the options.

[0040] The last step in flow chart 310 is step 313, in which therestricted options contract is delivered on the delivery date specifiedin the futures contract. If the price of Company A common stockdecreases significantly, the employee will have realized gainsreflective of the futures contract price and will deliver the 100 stockoptions to the purchaser of the futures contract. The purchaser maychoose to exercise the option at the expiration of the futures contract.Persons skilled in the art will appreciate that the purchaser of thefutures contract still obtains the underlying stock options even if thevalue of these stock options decrease. As a result, the purchaser stillhas the right to buy a specific number of stock at a specific price.Often, compensatory stock options will have either a long-term or noexpiration (e.g., exercise) date. Therefore, a long-term speculativevalue in the options contract may still be present even though theshort-term speculative value in the futures contract may have been lost.

[0041]FIG. 4 is an illustrative flow chart 410, in which a method forproviding and trading a futures contract on an options contract isdepicted. Included in flow chart 410 are three functions that aredepicted as steps 411, 412, and 413. Persons skilled in the art willappreciate that steps 411 and 412 are the same as respective steps 311and 312 from FIG. 3.

[0042] Step 413 of FIG. 4 may be realized after the restricted optionscontract has been provided and the futures contract based on thisrestricted options contract has been established. Particularly, step 413allows for the trading of a futures contract on an options contractbefore the delivery date of the futures contract. Persons skilled in theart will appreciate that the trading of a futures on options contractmay be embodied through a variety of exchanges, systems, or theequivalent.

[0043]FIG. 5 shows an example of a futures screen for the tradingoptions contracts. After selecting a particular options contract orgroup of options contracts, this screen displays relevant marketinformation. The information on the screen may typically include thesymbol of the pertinent options contract 510, the opening price for theoptions contract 520, the highest and lowest value the options contracttraded at within a specified period 530, the price of the last optionscontract traded 540, the settlement price 550—i.e., the current price ofthe options contract, the last change in price 560, and the openinterest 570—i.e., the total number of options contracts traded thathave not yet been liquidated.

[0044] One embodiment of the invention may also include a method andsystem for dealing with margin requirements in futures contracts onoptions contracts. Margin requirements, and credit checks seek to ensureparties to futures transactions that respective counterparties will meetthe delivery obligations of the futures contract. With respect tocompensatory options, some mechanism should preferably be used to ensurethat the employee, or some other suitable party, provides thecompensatory option at a future date.

[0045] For example, when an employee leaves before the term required forthe compensatory options to vest, he will not be able to satisfy thefutures contract because his compensatory options are nullified by hisfailure to stay at the company for the required term. In one embodiment,the compensatory options may revert to the company and be used by thecompany to deliver the options to the purchaser of the futures contract.In order to induce the company to perform such a service, any fundsreceived from the sale of the futures contract on the compensatoryoptions should preferably be held in escrow by the company until theemployee satisfies the conditions for vesting of the compensatoryoptions.

[0046] One difficulty that may arise with respect to such a method orsystem is the required conversion of the compensatory options to optionsthat may be dispensed to non-employees by the company. This difficultyis preferably dealt with according to the invention during the issuanceof the options by the company issuing the options as follows. In onesuitable embodiment, the company may write the compensatory options in asuitable way. One such suitable way may be to write the compensatoryoption such that it is convertible to an option of the company or byissuing new options to satisfy the purchaser of the futures contract atthe delivery date of the contract.

[0047] In any case, where the company is left to deliver on theoutstanding futures contracts, the company should preferably haveretained, as a result of the original deed on the futures contract, theproceeds of the sale. Thus, any employee who undertook to sell hisoptions may be required to have the proceeds of the sale retained in anescrow account, preferably with the company, until he delivers on thefutures contract. Such a method preferably encourages the employee tostay with the company because of the outstanding tangible benefit whichhe stands to gain by remaining with the company. In one preferableembodiment of this invention, a software module to process the data onthe trade of the futures contracts may also be used to account for theresponsible party for the delivery of the options contract, as well asto account for the appropriate recipient of the proceeds from the saleof the futures contract.

[0048] Accordingly, systems and methods for providing futures contractson options contracts are provided. It will be understood that theforegoing is merely illustrative of the principles of the invention andthe various modifications can be made by those skilled in the artwithout departing from the scope and spirit of the invention, which islimited only by the claims that follow.

What is claimed is:
 1. A method of providing a futures contract based onan options contract comprising: providing an options contract; creatinga futures contract based on said options contract; and trading saidfutures contract based on said options contract.
 2. The method of claim1, further comprising: delivering said options contract on a deliverydate.
 3. The method of claim 1 wherein said options contract is providedas a restricted options contract.
 4. The method of claim 1, furthercomprising providing for delivery of said options contract on aplurality of delivery dates.
 5. The method of claim 1, wherein saidoptions contract has an expiration date.
 6. The method of claim 1,further comprising providing a margin scheme for said options contract.7. The method of claim 1, further comprising providing a margin schemefor said futures contract.
 8. The method of claim 1, further comprisingproviding one margin scheme for both said future and options contract.9. The method of claim 1, further comprising: providing a first marginscheme for said options contract; and providing a second margin schemefor said futures contract.
 10. A system operative to provide a futurescontract based on an options contract comprising: a software optionsanalysis module to process an options contract and provide optionscontract data; a software futures contract creation module to create afutures contract based on the options contract data; and a softwarefutures contract trading module to facilitate trading of the futurescontract.
 11. The system of claim 10, further comprising a softwaredelivery module operative to provide delivery of said options contracton a delivery date.
 12. The system of claim 10 wherein said optionscontract processed is a restricted options contract.
 13. The system ofclaim 10, further comprising a software delivery module operative toprovide delivery on a plurality of delivery dates.
 14. The system ofclaim 10, wherein said options contract processed has an expirationdate.
 15. The system of claim 10, further comprising a software marginscheme module operative to provide a margin scheme for said optionscontract.
 16. The system of claim 10, further comprising a softwaremargin scheme module operative to provide a margin scheme for saidfutures contract.
 17. The system of claim 10, further comprising asoftware margin scheme module operative to provide a margin scheme forboth said future and options contract.
 18. The system of claim 10,further comprising a software margin scheme module operative to: providea first margin scheme for said options contract; and provide a secondmargin scheme for said futures contract.